Friday Financial Five – January 31st, 2014

The big financial news coming from the State of the Union address is the White House’s push to implement a government-sponsored savings account called “MyRA”. The account would be treated similar to a Roth IRA in that it would be an after tax contribution and would grow tax deferred. The funds would be invested in government bonds, which seems like a good way to make sure there’s always a market for the government’s debt. For employers that participate, the proposed threshold would allow contributions for households that make below $191,000. There would also be a maximum balance of $15,000, at which point the worker would be forced to roll the funds over to privately held Roth IRA. This isn’t a cure, but it brings renewed focus to workers’ lack of retirement savings.

Taper, taper, taper

In the lexicon of finance, “taper” has seen a compounded level of importance to the point that it may be the most important word for markets globally. The market’s abysmal week may have been a direct result of the anticipation of Wednesday’s Fed meeting. To their credit, the FOMC stayed the course and reduced bond purchases by another $10 billion, without any dissenting votes. This should continue throughout the year, while keeping the target interest rate near zero and reducing the market’s reliance. And at some point, the public will be able to hear “taper” and simply go about their day.

The intricacies of Roth conversion

All people with a traditional IRA can convert to a Roth, but some may shy away from doing it because of the steps or analysis involved. The primary concern is that converting will cause a taxable event. Any amount that is moved from traditional IRA to Roth will be included as income in the year of conversion, and it’s best that funds to pay that additional tax come from outside of retirement accounts. Converting is also not necessarily the end of the story. If an individual’s situation changes or the account value drops dramatically, the IRS allows a recharacterization of the IRA, reversing the process. Traditional IRA holders should review income, tax brackets, and financial goals to see if a Roth conversion makes sense.

Penalties for not having health insurance

With the Affordable Care Act dependent on young people enrolling, the IRS recently detailed possible penalties for non-compliance. The fine line here is making it painful enough that people will be inclined to join but not so burdensome that people go broke just trying to pay for insurance coverage. The penalty for lack of coverage starts out relatively affordable this year at $95 per month. It then jumps to $325 monthly in 2015 and $696 monthly in 2016. After that, the penalty will adjust according to inflation. The government will accept “minimum essential coverage” as proof of insurance, and the cost of this coverage can’t exceed 8 percent of an individual’s household income or the person is exempt.

Save the yacht owners!

Yacht owners and boat builders are uniting to save a tax deduction that currently allows the classification of yachts as second homes, which allows some owners to deduct financing interest. Democrats in congress are targeting this deduction as an unnecessary loophole, pushing the “Ending Subsidies for Yachts Act”. Currently, the IRS requires a camp stove, temporary toilet, and occupancy for 14 nights a year for yachts to qualify as a “second home”. This is a small portion of the overall interest deduction, but it’s expected to be included in a grander revision of the tax code.

Dan Forbes is a regular contributor on financial issues. He is a CFP Board Ambassador. He leads the firm Forbes Financial Planning, Inc in Providence, RI and can be reached at dforbes@forbesplanning.com.